1. Webinar: State and Local
Government Pension Reform
Lessons from negotiated reforms
and recent developments
June 21, 2012

2. Today’s Presenters
• Keith Brainard, Research Director, National
Association of State Retirement
Administrators
• Joshua Franzel, Vice President, Research,
Center for State and Local Government
Excellence
• Alex Brown, Research & Policy Analyst,
Center for State and Local Government
Excellence

3. Bird’s-eye view of public pensions in
the U.S.
Defined benefit plans for employees of state
and local government in the U.S.
• $3.0 trillion in assets
• 15 million active (working) participants (12
percent of the nation’s workforce)
• 8.0 million retirees and their survivors receive
$200 billion annually in benefits
• 85%+ of state and local government workers
participate in an employer-sponsored pension
plan

4. Overarching Issues
• Pension benefits for employees of state and local
government are in the midst of unprecedented
change
• Public employee compensation, including
retirement benefits, is the recipient of an
unprecedented level of attention from the media,
academics, and policymakers
• An unprecedented number of lawsuits challenging
changes to pension benefits are outstanding
• State and local government employment is lower
today by some 650,000 jobs, or 3.5%, from its
August 2008 peak

5. Overarching Issues
• Pension accounting standards are on
the verge of drastically changing the
way public pension liabilities and costs
are calculated
• Interest rates are at their lowest levels
in decades and are projected to remain
low through at least 2014
• Longevity is improving

6. Historical and projected
aggregate public pension funding levels
100%
90%
Actual
Projected
80%
70%
90 92 94 96 98 00 02 04 06 08 10 12
Fiscal Year
Standard & Poor’s, Public Fund Survey

7. Distribution of public pension actuarial
funding levels and relative size
Bubbles are
roughly proportionate
to size of plan liabilities

8. Changes to public pension plans in the
U.S.
• Higher required retirement ages
• Longer vesting periods
• Higher employee contributions
• Fewer/lower cost-of-living adjustments
• Greater use of hybrid retirement plans
• Increased emphasis on employee-employer
cost-sharing
• No shift to defined contribution plans as the
primary retirement benefit

9. Retirement eligibility has become more
stringent
• More normal (unreduced) retirement age
requirements of 60, 65, and even 67
• Elimination of retirement eligibility at any age
based on designated years of service
• Increased movement from five years as the
predominant vesting period

10. Retirement benefits are being reduced
• COLAs
– applied to only a portion of the benefit
– More COLAs delayed until attainment of
designated retirement age
– More COLAs tied to actuarial condition of
plan or fund’s investment performance
• Movement of final average salary period
from three years to five and longer

11. Higher employee contributions
• Many states have approved higher
employee pension contributions for
existing plan participants
• In some states, this is held or perceived
to be illegal
• Some higher rates are phased in over
several years

12. Growing use of hybrid plans
• Two main types of hybrid plan:
– DB-DC plans feature a traditional, more
modest pension, combined with a defined
contribution plan
– Cash balance plans feature pooled assets
with notional accounts that pay a
guaranteed minimum interest rate, with
possibility of sharing “excess” investment
earnings

13. 2011 Report
5 Case Studies of Negotiated
Public Pension Reforms:
• Iowa Public Employees
Retirement System
• Oregon Public Employees
Retirement System
Report Research Team: • Vermont State Teachers
Christine Becker, Alex Brown, Joshua
Franzel Ph.D., Elizabeth Kellar, and Retirement System
Danielle Miller Wagner of the Center for
State and Local Government Excellence • Houston Municipal Employees
and
Paula Sanford, PhD, of the University of Retirement System
Georgia
• Gwinnett County, GA

14. 2012
Reform Updates
2012 update fact sheets developed by
Center Staff led by Danielle Miller Wagner

15. Pension Reform
•Currently 35
States and 30
Local
•New examples
continue to be
added
For more information see: slge.org -> research -> retirement

16. Iowa Public Employees Retirement
System
• 2009 Reforms
• Raised
contribution rates
• Increased the
vesting period
• Modified the
benefit formula
SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

17. Oregon Public Employees Retirement
System
• Changed the method
used to credit
individual accounts
•Created a hybrid
defined benefit /
defined contribution
plan for new
employees
SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

18. Vermont State Teachers Retirement
System
• Increased contribution rates
• Increased requirements for full retirement eligibility
SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

19. Houston Municipal Employees
Retirement System
Passed a series of pension
reforms from 2004-2007
which:
• Increased employee
contributions
• Disallowed conversion
between tiers
• Modified the benefit
formula
SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

20. Gwinnett County, GA
• Need for more direct management of the
county pension fund
• Realization that defined benefit costs were
growing at a time of slow growth in the county
SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

21. Recent Reforms to Public Pension
Systems
Major Pension Reforms 2011-2012
New Employees Current Employees Current Retirees
Increased Contribution Rates AL, HI, MD, NH, NY AL, MD, ND, NH, NJ, VT, WI
AL, DE, FL, HI, MA, MD,
Raised Retirement Age ME
NY, OK
Reduced, Froze, or Eliminated COLAs HI, MD, MS FL, MD, VA ME, NJ, RI
Modified the Benefit Formula MA, MD, MS, NJ, NY, VA NH, RI
Restructured to a Hybrid Plan VA RI
National Conference of State Legislatures (Labor & Employment / Pensions)

22. Recent Reforms to Public Pension
Systems
• Rhode Island: Created a • Kansas: Created a cash
hybrid plan for all employees balance plan for all
effective July 1, 2012; employees hired on or after
January 1, 2014;
• Virginia: Created a hybrid
plan for all employees hired • Louisiana: Created a cash
on or after January 1, 2014; balance plan for state
employees and teachers
hired on or after January 1,
2013

23. Lessons Learned
1. Use quality data
2. Put reform in the HR context
3. Consider implementation when changing policy
4. Share information with all stakeholders
5. Plan carefully and evaluate all options
6. Recognize the importance of a strong governing
body
7. Fully fund the ARC
8. Financial education is key

24. Questions?
Links to more information
Center for State and Local Government
Excellence: www.slge.org
National Association of State Retirement
Administrators: www.nasra.org